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Mumbai: Indian indices witnessed their worst week since May 2020, reeling under the impact of an aggressive 75 bps rate hike by the US Fed, which is expected to keep markets under pressure in coming days too.

The Sensex and the Nifty ended the week 5.42% and 5.61% down from the previous week, their worst performance since the week of 5th May 2020, when both indices lost over 6% in a week.

Fears of further aggressive rate hikes by the Fed and the same forcing other central banks to raise rates in tandem have created a scare that the global economy may be headed for a slowdown. High interest rates, along with sticky inflation is expected to keep corporate earring under check, even lead to an increasing number of downgrades, which will put markets under further pressure, believe experts.

“After the US Fed decision on rates and guidance on path for QT and successive rates were announced. Markets initially winessed relief rally on back of major event getting over. However sooner than later the markets have re-alligned its focus towards overall slowing economic growth forecast and fears of falling into recession amid seemingly high inflation which has potential of triggering earnings downgrades for corporate sector leading the markets down," said Narendra Solanki, Head of Research , Investment Services, Anand Rathi Financial Services.

Sensex
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Sensex

He added that the next couple of weeks are now crucial as markets take stock of inflation data post this hike and till then markets are expected to remain volatile.

According to Gautam Shroff, MD & Head, ICG, Edelweiss Securities Ltd, the markets are progressively moving from Fed tightening scare to growth scare with chances of soft landing reducing.

“While the goods inflation has eased from demand side; supply issues linger (wrt crude oil and food) and Services inflation is rising still and is very often a significant lagging indicator (remaining elevated throughout recession). This may keep disinflation process slow in the near-term," he said, adding that any easing in geopolitical tensions could help improve the supply outlook on crude oil and food which will be very welcome.

“We maintain cautious stance but from a medium term outlook, we remain bullish given the strong bank balance sheets, corporate balance sheets and also the benefit of reforms which is due," added Shroff.

The Fed move is also likely to give further impetus to FII selling, which has already Rs2 trillion so far this year.

“During May FPI sold equity worth 45276cr. The relentless selling continued in June and till 17th June FPIs had sold equity worth Rs. 28445cr. For CY 2022 till 17th June, FPIs have sold equity to the tune of 202244 cr. FPIs have been selling heavily in other emerging markets like Taiwan, and South Korea too. The strengthening of the dollar and rising bond yields in the US are the major triggers for FPI selling. In India, FPIs continued to sell in financials and IT where their holding is the largest," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Rising interest rates and yields will move more capital from equities to bonds, said Vijaykumar.

“Since the Fed and other central banks like the Bank of England and the Swiss central bank have raised rates, there is synchronised rate hikes globally, with rising yields. Money is moving from equity to bonds," he said.

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